Friday, July 30, 2010

I'm now in possession of trillions of dollars of Zimbabwean currency, thanks to Karen Poole, the gracious proprietor of the Imbabala Zambezi Safari Lodge, where we spent a few days before moving on to Victoria Falls. (More on the charming Imbabala to come.) Unfortunately it's worthless, the victim of world-record-setting inflation.

Last year Zimbabwe finally gave up on its efforts to maintain its own currency, and the people are still cheering. It's now legal to use any hard currency to settle bills and debts, and most places are simply pricing things in dollars. As a result, inflation collapsed from a high of over 20,000% to essentially zero, virtually overnight. Confidence and economic activity are picking up as economic turmoil has almost vanished. It's one more example of how economic growth thrives when inflation is low and uncertainty is eliminated.

Put another way, if printing lots of money could contribute to growth, Zimbabwe would be the strongest economy in the world, but of course it's not. That's another reminder for those who want the Fed to ease even further: economic growth cannot be created by the printing press. On the contrary, the U.S. economy would be doing better today if the Fed addressed the looming inflation threat represented by the $1.3 trillion dollars of bank reserves it has injected in the past two years.